How VMI is Keeping CPG Products on Shelves
Today’s ongoing shutdowns and stay-at-home orders have impacted every consumer industry, from fashion to farming, to technology. Consumer Packaged Goods (CPG) are no exception, but the swings in consumer behavior in this industry are both massive and varied, leading to even more confusion for manufacturers, suppliers, and retailers.
According to research from Nielsen, total CPG sales for the two weeks ending on March 21st of this year were up $8.15 billion from the two weeks prior. Year-over-year, total sales in stores have surged 45%, while online sales have skyrocketed more than 90%. Yet not all CPG products are feeling the love. The research shows that in stores, consumables are quickly outpacing non-consumables; the exact opposite is occurring online. And while some products like toilet paper are seeing a sales downturn, it’s hard to say whether that’s due to decreased demand, or the simple inability to keep shelves stocked.
For retailers that are still open, capricious market demand is making replenishment and supplier collaboration more complicated than ever. Vendor Managed Inventory (VMI) offers one way for retailers and their suppliers to take back control.
What is VMI
Vendor Managed Inventory is a streamlined approach to supplier collaboration, inventory management, and order fulfillment that changes the traditional ordering process. Instead of the distributor (or retailer) bearing the burden of replenishing stocked products, the manufacturer (or supplier) assumes responsibility for monitoring the distributor’s stock position and replenishing their own product based on the two parties mutually established goals and objectives. When done right using a top-quality VMI software provider, both parties win and enjoy increased sales, improved inventory turns, lower transportation costs, and better service.
Learn more about VMI and Collaborative Replenishment.
Transparency is Key to Replenishment
In order to adapt quickly to changing customer demands, manufacturers, retailers, and suppliers need transparency and visibility across their supply chains. Knowing exactly what you need to replenish to keep shoppers happy is a prerequisite for success. Cooperation and commitment are the main drivers behind transparency, followed by the right support from your trading partners.
Getting Products to the Shelves
Having the right products on time in a shop has never been easy. But in these fitful times, when customer needs are changing week-to-week, it is even more challenging. Retailers and suppliers that allow each other a glance into their respective data will perform better than their peers, both now, and as we emerge into the next phase of retail shopping. They can react quicker and more precisely to customer demand.
Benefits Using VMI in a Changing Market
Streamlined Order Handling and Replenishment
Customers can’t buy what isn’t on the shelf, and during these chaotic times, retailers may be too overwhelmed to focus on proactive replenishment. Vendor managed inventory encourages data sharing between retailers and their vendors, so vendors can quickly understand how fast a product is moving, and ensure that new products hit the shelves quickly to minimize stock-outs. VMI software streamlines the process by automating data transfer and using “rules” chosen by vendors to determine how much stock needs to be replenished, and when it needs to be delivered to keep up with demand.
Options like allocation take collaborative replenishment solutions to the next level, by integrating a supplier’s inventory availability and any existing shortages into account. With this knowledge in hand, suppliers can prioritize their inventory to meet the needs of their most critical locations and customers. As we’ve already seen on grocery store shelves (read: toilet paper, hand sanitizer, and now bread flour), excessive demand for some products is forcing retailers and suppliers to make these tough decisions; to do so, they’ll need all the data they can get.
Because retailers don’t need to create orders when using VMI, order handling becomes a much smoother process. Instead of having to input a new order every time, the replenishment system prompts the supplier to validate automatically created orders based on a variety of signal(s), which the retailer provides. And because the supplier and retailer are sharing information, the supplier spends less time correcting or adjusting orders. This is a considerable time saving benefit. With fewer hours spent on ‘touching orders’, both parties gain time to focus on value-added activities and a joint-strategy.
Reduced Transportation Costs
Transportation costs are one of the top worries on many CPG producer and retailer minds. In 2019 alone transportation costs rose to an incredible $1.04 trillion; now, with truck driver shortages at an all-time high, and demand for goods like consumables and household items soaring, trucking rates are once again on the rise.
VMI might not be a cure-all for transportation costs, but it can help with creating optimized truckloads, minimizing LTL shipments and reducing capacity costs. Built-in intelligence lets vendors optimize shipments for maximum vehicle fill rate (VFR) – always using the next most-needed SKU’s to ensure vital products hit the shelves first. The solution can even combine non-VMI open orders with the most recently generated VMI orders to drive further transportation savings by consolidating shipments. Not only can this save you upwards of 4% on transportation costs; it also helps reduce overall truck and driver demands, which can help stabilize shipping rates.
During normal market times, returns add cost, waste productivity, and strain vendor-retailer relationships. Right now, those headaches are magnified a few dozen times. For suppliers, handling returns means losing valuable time responding to demand changes, and those changes might make reselling returned items more difficult, leading to even greater losses. For retailers, sending returns and waiting for new products can result in empty shelves.
Incorrect product assortments, poor ordering behavior, a lack of data sharing, and demand swings all contribute to increased returns, and it’s easy to understand how trying to control the process manually might lead to more mistakes in times like these. Collaborative replenishment with VMI combines distributor information with supplier information, such as product life cycle, lead time, package size, and item numbers, to create more efficient orders. By working together, the supplier and distributor are able to remove excess inventory from the channel and reduce their returns by up to 50%.
Supplier Collaboration for Retail and CPG Success
We’ve learned a lot from this crisis already about the importance of supply chain visibility and collaboration. Using VMI to work directly with your suppliers is just one more way you can ensure your customers have access to the products they need, even during times of uncertainty. Even better, VMI doesn’t stop helping when things settle down; the beauty of supplier collaboration is that it helps give you stability in times of need, and ushers in new growth and increased profitability.
If you are new to the idea of VMI, or aren’t sure if your current VMI program is working for you, we encourage you to reach out to our VMI experts to discuss your needs. You can also learn more about collaborative replenishment in our What is VMI? guide.